India At 75 | Digital Banking Units will boost India’s rural financial landscape

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India is accelerating fast on the highway of digital economy, and currently boasts of a superior ecosystem which has encouraged thousands of innovations across the spectrum. We have already hit a century when it comes to unicorns in startups with a total valuation of $332.7 billion. In the first four months of 2022, India has given birth to 14 unicorns with a total valuation of $18.9 billion, and it is estimated that one out of every 10 unicorns globally are from India.

In this backdrop it comes as no surprise if digital lending is also attracting the attention of both banks and policy-makers. The Government of India’s initiative, announced in the Union Budget in February, to set up 75 Digital Banking Units (DBUs) in 75 districts is indeed a major step to bring more people into the formal economy. Recently news reports suggested that on August 15 Prime Minister Narendra Modi would inaugurate these 75 DBUs to commemorate 75 years of Independence.

Even today, 65 percent of India’s populace still live in rural areas. There are about 640,000 villages in our country and, for various reasons, a sizable population of these villages are still out of ambit of formal credit. We have about 53,000 public sector bank branches in the villages (rural and semi-urban). On an average one bank branch is serving some 12 villages. In some states, and in underdeveloped areas, one bank branch could be serving 20 or more villages.

Across most states, and especially in eastern India, the share of the number of accounts held by small and marginal farmers is disproportionately low when compared to their actual numbers. This again does not include the landless farmers, oral lessees, and sharecroppers.

It has been observed that most people in rural areas are still not comfortable visiting a bank branch, and to overcome this obstacle they use the help of agents/middlemen. It is here that a friendly branch manager of a bank who can understand their language and requirements will make a difference. The proposed 75 DBUs will play a major part in breaking these barriers, the entirely paperless experience will be a welcome change, and will encourage more people to seek services from these banks. This initiative has the potential to break the chain where a lot of people in rural India continue to be largely dependent on informal sources of credit.

The focus of these DBUs will be on educating customers and engaging prospective customers with the digital experience. Emphasis will also be cyber security awareness, and a customer redress mechanism will also be put in place. The Government of India’s move to extend DBUs to rural areas is indeed a bold move. These DBUs in 75 districts amounts to about 10 percent of the total districts in India, and the learnings from here can be taken to other districts which are currently unbanked.

Bringing the postal offices, which is another budget announcement, under core banking solutions will enhance the access of people living in rural areas to formal banking and formal credit network. The existing 53,000-odd bank branches with about 120,000 postal offices in rural areas will bring down the number of villages per bank branch to about four. The business correspondents can continue to play their bank mitra roles. The transfer payment story has been quite a success from a modest beginning in 2016 to now when the NPCI aims at 1 billion transactions a day in the next 3-5 years.

In a similar fashion, these DBUs can usher in the next generation reforms in India’s banking sector.

Bikash Narayan Mishra is senior adviser, Indian Banks’ Association. Twitter: @bnm1960. Views are personal, and do not represent the stand of this publication.